457(b) vs. 401(k) Plans: Benefits & Differences
Below, we cover the basics of 457(b)and 401(k) plans, look at the key differences between the two plans, and explore their respective benefits.
457(b) Plan vs. 401(k) Plan Comparison Chart
The following chart compares the contribution limits for 457(b) plans and 401(k) plans for 2024.
| 457(b) plans | 401(k) plans | |
|---|---|---|
| Maximum Annual Deferral | $23,000 | $23,000 |
| Age 50 Catch-Up Limit | $7,500 | $7,500 |
| Pre-Retirement Catch-Up Limit | $23,000* | None |
| Offered to | Public service employers for their employees | Private sector employers for their employees, and some public service employers for their employees if the plan was established prior to 1986 |
*Can't be combined with Age 50 Catch-Up in same year.
457(b) vs 401(k): Similarities and Benefits
457(b) plans and 401(k) plans are very similar. Both offer you the opportunity to make tax-deferred contributions to a retirement account. That means the money you contribute isn’t counted as taxable income for that year, therefore reducing your income tax liability. Instead, the funds can grow tax-free over the course of your career and are only taxed when you make a withdrawal. 457(b) plans and 401(k) plans even have the same annual deferral limits which may change from year to year. See the annual contribution limits for this year.
Another similarity is that 457(b) and 401(k) plans also could allow Roth contributions. Roth contributions are made on an after-tax basis, so you pay income taxes on the money before you contribute. Then, when you withdraw those funds, you pay no taxes on the money as long as you are over age 59½ and you made your first Roth contribution to the account at least five years before your first withdrawal.
Both plans also allow someone over age 50 to make an additional contribution of $7,500 per year. A 457(b) plan also allows you to make an additional Catch-Up contribution up to the annual maximum deferral allowed, for the three years before your normal retirement age. If you declare you plan to retire at age 70, for example, you can essentially make double contributions in the three years prior to the year you turn 70, subject to certain limitations. Note that you can’t make the Age 50 Catch-Up and the Pre-Retirement Catch-Up in the same year.
The Differences Between 401(k) and 457(b) Plans
While 457(b) plans and 401(k) plans are similar, they don’t apply to every employee: Generally, 401(k) plans are offered to employees of for-profit companies; 457(b) plans are provided to state and local public employers, as well as some employees of non-profits. Employees of for-profit enterprises are not eligible to participate in 457(b) plans while public employees may participate in either or both plans, depending on whether their employer offers them
The two plans are also different in that 401(k) plans do not offer a three-year Pre-Retirement Catch-Up; and 457(b) plans do.
Another difference is that a 401(k) distribution prior to age 59½ may be subject to a 10% early withdrawal penalty and 457(b) plans generally do not have the same early withdrawal penalty.
However, if you change employers, you can move the funds in your 401(k) to your new employer's plan, assuming they offer a 401(k), without a penalty if you follow IRS rules for a "rollover."
Offering a 401(k) and 457(b) Plan Together
For-profit companies typically offer 401(k) plans but are not eligible to offer 457(b) plans, which are restricted to only public-service organizations. In some cases, a public-service employer may offer a 401(k) to its employees, but only if the plan had been established before 1986.
If you participate in both plans, you can contribute to both in the same year, thereby increasing your annual maximum deferral in a single year.
401(k) vs 457(b) Plans: Which Is Better for Participants?
Despite their differences, 401(k) plans and 457(b) plans offer similar benefits to employees, Public-service employees who work for a public organization that offers both a 457(b) and 401(k) have access to both types of retirement plans.
Start a Plan – Plan Sponsors
If you’d like to discuss how MissionSquare would manage your employees’ 457(b) plan, contact us.
Enroll in a Plan – Employees
Want to discuss enrolling into your retirement plan with MissionSquare? contact us.